Informavore: What Vegas Can Teach Entrepreneurs

Having more information at your fingertips has always made the logical jump to better decision-making, but there are unique cases where this falls flat. Often our unique humanness and inherent biases get in our way and cause us to choose wrongly, usually to the tune of large sums of money.

Vegas is the most common scene of these surprisingly well-known crimes to the self. This mecca for any and all surveillance has aggregated some of the most interesting behavioral data around, and helped unearth two decision fallacies we as humans often fall victim to – the gamblers’ fallacy and the hot hand.

The gambler’s fallacy is most recognizable when a player believes (incorrectly) that after three red numbers appearing on a roulette wheel, a black number is then “due,” meaning it is more likely than a red number. The probability of this outcome is actually not in the player’s best interest. Another similar fallacy is the hot hand, seen when a player believes that he is on a winning streak and that whatever number he chooses to bet on is likely to win in the future.

So, if these are bad decisions on the part of the player, how are businesses preying on this information to make millions and how can we as players take this power back and beat the casinos of the world at their own game?

Based on this University of Nevada study from the Center for Gaming Research, behavioral surveillance or data mining is an area where casinos have excelled for years.

Player cards programs, aka loyalty programs, like Harrah’s Total Rewards helps casinos track what players are spending and predict within a small variable of accuracy how much a player will spend in that casino.

Casinos use this information to target their marketing efforts and get the biggest bang for their buck, per say. It’s then safe to bet (and likely win) that when you start dropping large sums of money in Vegas, all eyes are on you.

The big payoff comes when we become more aware of these inherent biases and connect them to more than simply gambling. First time entrepreneurs are constantly making decisions with present biases and flaws – decisions that could deviate into lots of revenue lossed or gained. No one has the answers to keep these irrational decisions at bay, but the message I am trying so desperately to get across is – pay attention to your data! It will likely be your best entrepreneurial decision.

So often, entrepreneurs get wrapped up in their own gambler’s fallacy or hot hand. In the case of a real life gambler’s fallacy – the new entrepreneur may be facing some uphill challenges, loosing faith in their company, product, or even themselves, and start throwing anything and everything at the wall, seeing what sticks. This startup version of “going on tilt” tends to only add to the frustration and solves nothing.

Of course, failure is often part of the path to success that is a logical mathematical truth. If the average success rate is 25%, then the chance that someone will fail once is 75%. However, the chance that someone will fail twice is only 56%, etc, etc. An example of this in finance translates into a person selling their shares based solely on the fact that the stock has risen for several days in a row and must decrease. This may seem logical, but is not necessarily so.

However, the same downfall can just as easily strike because of the hot-handed entrepreneur who seems to be full of luck. He may be on a winning streak, but if he loses sight of his market, consumers, or company goals – in other words, what the data is actually telling him – he can be equally susceptible to his emotionally biased blindspots.

Both of these mistakes are caused by the nature of the human mind. They are false beliefs that a positive or negative trend has hold on future outcomes and thus, your decision-making. This is nothing new in behavioral studies, which have been preaching these sorts of lessons for some time, but it’s an important reminder for entrepreneurs.

In the end, individuals sometimes act irrationally and make decisions based on emotion rather than reason. We fail to process probability and make decisions accurately when facing uncertainty. And let’s face it, not many careers offer more uncertainty than that of the entrepreneur.

Posted by Royal Frasier http://twitter.com/royalfrasier Royal Frasier writes the Informavore column for Austin Startup, covering everything from emerging data applications to charts that will have you drooling. She has a particular interest in spreading the value of better predictions and recognized relationships from mining, visualizing, and applying data for different situations and tasks. That or just spilling over the newest data porn. When not digging up information on the Web, Royal enjoys playing Frisbee at Zilker park, kayaking, perusing creative design magazines and sites, reading some elitist fictional novel, or just planning her next adventure. Royal is a PR hacker by day and works with a highly skilled team to bring early-stage technology companies to market To read more posts click here.